subject: Forming A Corporation In Texas [print this page] Incorporation is one of the first steps to starting your own business in Texas. The state law provides three options for doing this: a regular corporation, a close corporation and a professional corporation. However, you can't just pick whichever type of corporation you feel like. You'll need to pick the type that's right for the type of business it will be and the type of investors who will own it.
Professional Corporations: Required For Many White Collar Occupations
In Texas (as well as most states), many professionals licensed by the state cannot incorporate as a traditional corporation. Instead, they must operate as a professional corporation. Such professions include law and accounting.
A professional corporation still provides many of the same benefits as a tradtitional corporation. However, with professional corporations Texas requires that shareholders be professionals licensed in the state. Depending on the profession, Texas has specific operating rules (one common rule is that each office must be supervised by a licensed professional).
By the way, Texas professional corporations need to include either "P.C." or "A Professional Corporation" in their business name to identify themselves as professional corporations.
You can contact the state agency in charge of your profession to determine if someone in your line of work needs to be a professional corporation, but note that the list of Texas professions that must use a professional corporation includes attorneys, certified public accountants, dentists, insurance agents, nurses, optometrists, physical therapists, and veterinarians. Also, note that in Texas, physicians don't incorporate, they instead form professional associations
Close Corporations: Often Right for Family-owned Ventures
Texas and about a dozen other states offer small businesses an alternative to the traditional corporation--the alternative of a "close corporation."
Basically, a close corporation is governed by a simpler set of rules so that the business, a one-owner or husband-and-wife operation, isn't overwhelmed with the kind of rules and regulations that a larger corporation needs.
Lightening up and simplifying the default corporate governance rules may sound like a terrible idea, but the default rules protect individual shareholders in large professionally managed corporations. The default rules, for example, include items such as annual stockholder's meetings and a board of shareholder-elected directors who supervise the managers and corporate officers running the corporation.
This system of governance works well for larger ventures. But the formality of the system may be overkill for very small corporations--such as those with single shareholder-employee or those with only family shareholders.
If you're setting up a family business and if all your shareholders are agreeable to the less-restrictive rules, accordingly, you definitely want to consider the close corporation option. You form a close corporation in the same basic way as you form a regular corporation but state within your corporation articles that you're forming a close corporation.
Note: People interested in the close corporation option probably also want to look at the limited liability company option. A limited liability company probably offers even greater simplicity than a close corporation. In addition, an LLC provides its owners with more tax flexibility.
Regular Corporations: Default Choice for All Entrepreneurs
If you're not running a profession required to use a professional corporation or starting a small family business, you'll probably end up using a regular corporation. In other words, a regular, traditional corporation is the default choice for entrepreneurs.
S Corporation: Not Actually a Real Choice
One final piece of information: As an accountant, many people often ask me about the S corporation option. However, an S corporation isn't actually a corporation at all; it's a set of tax accounting rules that eligible entities can use for preparing their tax returns.
Any of the corporation options mentioned above can elect to use the S corporation tax accounting rules--that is, if the corporation meets the eligibility requirements.
Note: Some entities that aren't even corporations get to use the Subchapter S corp accounting. For example, LLCs may be able to use S corporation status.
by: Stephen Nelson
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